It was no surprise that the RBA kept interest rates on hold at their September meeting, but home owners and property investors are not out of the woods for the remainder of the year yet and should factor rising rates into their budgets well into 2011.
Recently there has been a great deal of speculation from many analysts surrounding the possibility that some banks would make their own move, independent of the Reserve Bank, to increase retail rates in order to offset the increased cost of funding they’re wearing.
Obviously this would not be the best step in terms of the banks’ popularity which, given the desperate scramble to lure new borrowers that’s now occurring, is a high priority.
The latest announcement from Reserve Bank Governor Glenn Stevens has possibly let the banks off the hook however, with the RBA suggesting they will be forced to reconsider keeping the cash rate at its current level of 4.5% until the end of the year, as many commentators were predicting.
So how soon will interest rates rise again and how high will they go?
Over the last week or two a number of economists have come out with forecasts of a strong economy and rising inflation, leading to significant rate rises over the next couple of years.
Bill Evans of Westpac expects three rate rises in the next year saying, “At present we are expecting rates to rise by 75 basis points during 2011”.
NAB economist Peter Jolly thinks we may be hit with four rate hikes: “Our year ended GDP forecast has lifted to 3.25% from a little under 3%. As a consequence, we debated whether the 100bps of tightening in our forecast starting February 2011 was enough. We think it is, but it did remind us that a 2010 hike remains possible should either a) Q3 inflation in late October be shockingly high or b) the economy grows above trend in the second half and the unemployment rate (now 5.3%) plunges through 5% – quite possible.”
JP Morgan expects inflationary pressure to grow, which will of course push interest rates up: “Another report of surging jobs growth, with August ANZ job ads survey showing 2.6% on-month growth, could make RBA thinking a little more difficult in months ahead”, says JP Morgan economist Helen Kevans.
“Inflation is a big risk and it’s going to cause a headache for the RBA. On one side we have a deteriorating global outlook and on the other side, we have local outlook where inflation pressures are quite widespread,” says Kevans, who tips strong corporate earnings, terms of trade, and even wages growth as all pushing inflation higher.
BIS Shrapnel’s Long Term Forecasts report predicts that the Australian economy will rebound and inflationary pressures will force mortgage interest rates above 9% within three years. BIS’s senior economist Richard Robinson says tightening labour markets and increases in household spending will lead to a higher CPI, which will in turn prompt the Reserve Bank to increase interest rates. Robinson forecasts that over the next three years the cash rate is likely to reach 6.5%, up from its current level at 4.5% which, when factoring in the banks margins, could see retail rates rise to over 9%.
Speaking in country Victoria this week, RBA Governor Glenn Stevens said high export prices and “the largest minerals and energy boom since the 19th century” should see economic growth continue, providing further catalyst for the RBA to continue increasing interest rates over the coming decade.
This scenario is becoming more and more likely, with our current booming economy and rapidly decreasing unemployment levels likely to force the RBA’s hand earlier than expected.
I would not be surprised if we are hit with a further two rate rises before the end of the year in the order of a quarter per cent each or .50% in total. Of course once you account for the banks own increase on top of the RBA’s, which will potentially be around 0.1 to 0.15%, this represents a significant rise for the average mortgage holder.
Stevens said that barring any unforeseen international or domestic economic downside possibilities, “the task ahead is likely to be one of managing a fairly robust upswing. Part of that task will, clearly, fall to monetary policy.”
The next rate-setting meeting of the RBA is scheduled for October 5, with the debt futures market hinting at a slim chance of a rate rise at this time.
As a result of this economic “perfect storm”, the RBA are desperately trying to get the message across to Australian households that now is not the time to be spending up big. Essentially they want us to tighten our belts before they’re forced to tighten them for us, in the form of higher rates than might otherwise be necessary.
The take home lesson for property investors and home owners is to budget and factor a bigger buffer in your financial and property investment plans to allow for the inevitable rate rises to come. Of course, the good news is that if the economy does boom and inflation increases as expected, so will the value of your property.
Ultimately, there are still a few good years ahead for property investors until retail interest rates increase to about 9% and stifle this property cycle.
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